This article first appeared in The Edge Financial Daily on January 12, 2018 - January 18, 2018
Tan Chong Motor Holdings Bhd
(Jan 11, RM1.77)
Maintain hold at unchanged target price (TP) of RM2.11: Tan Chong Motor Holdings Bhd (TCM)’s wholly owned subsidiary, TC Motor Vietnam (TCMV) has entered into an exclusive distributorship agreement with Xiamen King Long Automotive Industry Co Ltd to distribute, assemble and provide after-sales service for King Long XMW6829Y coach model in Vietnam. King Long is a company incorporated in Xiamen (Fujian), mainly involved in developing, manufacturing and selling large and medium-sized coaches and light vans. The exclusive agreement will run for a duration of five years commencing from the date of execution of the agreement by both parties, with extension subject to mutual agreement. The agreement also stipulates that the assembling operation in TCMV will commence in 4Q of 2018. Under the agreement, the initial cost for the new venture with King Long is estimated at US$9 million (RM36.1 million) for the first five years. The cost will be funded by TCMH Group.
We are mildly positive on the news as TCM will be able to improve the utilisation rate of its Danang plant with the new assembling line for King Long. The plant is still loss making due to the low production volume for Nissan Sunny (Almera) and X-Trail. However, we do not expect substantial volume contribution from the new distributorship for King Long models. Hence, the earnings contribution will be insignificant and unlikely to turn TCMV around in the near term.
Risks includes prolonged tightening of banks’ HP rules, slowdown in the Malaysian economy affecting car sales, slow market development in Indochina, and global automotive supply chain disruption.
Recent ringgit stabilisation has improved the outlook of TCM, given its large cost structures denominated in US dollars. However, the weak sales volume remains a concern due to low operational scale. We believe that TCM current share price has already priced in the weak sales volume. We maintain our “hold” recommendation with unchanged TP of RM2.11 based on 0.5 times price to net asset value. We believe the ongoing loss making will continue to drag investor confidence. — Hong Leong Investment Research, Jan 11